Platforms and Utilities

There’s a lot of buzz around the word “platform” right now. We are entering and age, some people tell us, of the “platform economy”. What?

A platform, as I understand it, is simply a business strategy that focuses on the creation and then exploitation of an external [external to any particular business] ecosystem of complementary products or services and innovations that provide positive feedback so that the value of the platform is increased.

Phew.

How much jargon is there in that?

One of the great spin-offs of the hyperbole surrounding the technology sector of our economy is that it constantly invents new uses for old words. And it grabs hold of anything vaguely avant -garde in order to maintain its self-proclaimed image of innovation. Or ought I say innovativeness? Word invention being one of the sector’s particular specialties.

Wait, we aren’t done yet.

The real value of a platform thus defined is that they exploit “network effects”. Network effects are those that induce more activity the greater the network. In other words a network has value simply because it exists. And the larger the network the more activity it will engender. As they used to say: one thing leads to another. The problem with networks when understood this way is that they suggest increasing returns to scale. That is to say the return to the owner of the network will increase as the network gets bigger. It will attract more activity simply by being big. And by attracting more activity it then gets bigger, thereby attracting yet more activity. And so on.

A telephone system has little value if there are only two phones connected to it, but a system with millions of phones allows for a whole lot more value to be created. Think of all those calls!

Now, a platform economy is one where there are several platforms of various sorts vying for customer attention. More to the point it is an economy where being part of a poor platform, or not having one of your own, puts a business in a very precarious position. It is easy to be marginalized if you don’t own a platform. It is easy to make excess profits if you do.

The iconic platform of yore was the old IBM mainframe computer. Once a business was hooked on IBM with all the various additions and benefits that being so hooked brought, it was virtually impossible to get away. IBM had you in its grasp and could fleece you for years. It took the demise of mainframes and their replacement by a new platform to shake IBM’s grip and almost plunge it into oblivion.

The Microsoft/Intel PC became the next platform, until it was challenged and replaced by the internet and the world wide web.

Nowadays platform happy business strategists talk of several kinds of platform:

Innovation platforms: these sit on top of a large pool of developers and service providers who all exploit the common core and produce a swathe of complementary stuff in what people like to call an innovation ecosystem. Apple and Google are innovation platform providers.

Transactional platforms: these are those that connect people and allow various kinds of transactions including the commercial sort we know as e-commerce. Amazon and E-Bay are examples of transaction providers.

There are other kinds of platforms, but let’s not get too carried away.

There are a couple of points we need to keep in mind before we get swamped by all this jargon.

First, and most basic, is the notion at the heart of the entire platform mania: increasing returns to scale. This is a dagger in the heart of traditional economics, built as it is on the dominance of diminishing returns to scale. In a more balanced theory both effects come into play. The idea of increasing returns to scale is not new, but, perhaps, it took the hyperbole of Silicon Valley to raise awareness sufficiently that we can now put diminishing returns into its rightful place. Which is somewhere to one side.

Second: and in the context of the fuss Robert Gordon has stirred up with his “end of growth” speculation, the so-called innovation of all these platforms leads me to wonder about electricity. Surely electricity is the ultimate platform? Indeed every single one of these hyped up versions simply sits on top of electricity. So the electrical grid is really the meta-platform that these sub-platforms then exploit.

And we regard electricity as a utility, not as some super-duper new idea. It is a boring old utility on top of which our modern world sits. Good heavens we even regard the electrical grid as being boring old infrastructure, like roads and bridges, rather than as a brand new business strategy waiting to be exploited by some bright entrepreneur.

So what, apart from the relative novelty, distinguishes these so-called innovation and transactional platforms from the electrical grid? Are they not utilities too? Is there something in an economic activity that is subject to increasing returns to scale that ought induce us into managing and even owning that activity somewhat differently from those subject to diminishing returns to scale? After all, almost by definition, isn’t the purpose of a “platform” to establish a quasi-monopoly in order to extract excess profit? Isn’t that anti-social?

Or am I missing something?